Note from the CEO of Kotak Securities

By Kamlesh Rao, CEO of Kotak Securities:

From the CEO’s Desk: Indian Markets cheer the Fed’s dovish stance

The Sensex has surged over 300 points today as the US Fed left the interest rates unchanged. It did not give any major hints about the future trajectory of interest rates and more importantly, on the timing of the first rate hike. These slightly dovish comments came in along the expected lines. The Fed said, the economy is expanding moderately. It also hinted, it will wait for further improvement in the labor market and for higher confidence that inflation would rise, before making any decision on hiking the rates.

The Fed also downplayed the importance given to the first rate hike and advised looking at the longer term trajectory of hikes in the future. It seemed to indicate, the first rate hike does not mean consistent rate hikes in future quarters. There is a possibility of a pause in rate hikes. For India, this is positive, primarily from the perspective of fund flows. A gradual rate hike is already discounted by the markets, except for a temporary impact at the time of the first hike. At the same time, a very strong pickup in the first pulse of monsoon augurs well for the economic growth as well for the disinflationary trend in the economy.

Key triggers for the Indian markets

The Greece issue and progress of monsoons will be the trigger in the immediate term. A strong pickup in the first pulse of monsoon augurs well for the economic growth as well for the disinflationary trend in the economy. We also expect Greece and its creditors to find a solution to the current impasse. Over the medium term, markets will look out for Government’s efforts on kick-starting stalled infrastructure projects and new project awards. Passage of the Constitutional Amendment Bill for GST as well as further progress on Land Acquisition Bill would also be key triggers for the markets over this period. Markets will also take cues from management comments regarding ground level impact of all initiatives taken by the Government over the past few quarters.

Indian rupee to be on the guard

Indian Rupee is expected to continue to trade a narrow range, thanks to active intervention of the central bank on both sides of the market. The RBI is eager to accumulate more foreign exchanges, as an insurance against large foreign currency investments and obligation and also at the same time, not allow Rupee to become too strong that it hurts export competitiveness. Hence, we may continue to see the central bank intervene to keep the US Dollar supported between 63.00/63.30 levels on spot. At the same time, depreciation beyond 64.50/70 is appears unlikely, as the central bank has emphasized on the need for stability. However, if the Greek scenario blows out of control, then Rupee can decline much beyond 65.00, possibly towards 66.00 levels, but we then also expect RBI to intervene to bring prices within its preferred band.

What’s in store for the investors?

Even as the markets is weathering the monsoon, Greece crisis and the fine print of the US Fed policy now, the medium to long term growth story is still intact. Because of government’s continued focus on reforms, we continue to maintain a positive stance on the markets from a medium term perspective.